If you explore how much you need to retire, you might hear big numbers like $2 million. But do you really need that much? Can you get by on something substantially less than that and live comfortably?
The answer may be "Yes" for some people. However, the real question is whether you have the financial resources to support your level of spending for the rest of your life. To figure that out, learn how much income a couple might expect with $300,000 in a retirement account.
While the example below might not match your situation perfectly, you can apply the same concepts and calculations to help figure out your retirement plan.
- Retiring on $300,000 may be possible for some people, but you'll need to have a strategy in order for that to work.
- Social Security, pensions, and other sources of income can help supplement any money you have saved.
- Be sure you're prepared for healthcare costs, taxes, market losses, and other factors that may impact your money in retirement.
Sources of Retirement Income
In addition to whatever you have saved, you’ll probably receive some retirement income from Social Security, or possibly a pension. To plan your retirement, start by understanding how much base income you will receive. These are “guaranteed” sources of income that should continue regardless of how much money you’ve saved on your own. Social Security and pension income are two of the most common.
As of 2021, more than 50% of people over age 65 get at least half of their income from Social Security, and almost 90% of individuals over age 65 receive Social Security benefits.
The average Social Security retirement benefit in 2020 was $1,514 per month (a little more than $18,000 per year). Depending on your earnings and when you claim, you might receive more or less. For the example in this article, we’ll assume an average annual income of $18,000 per year from Social Security. We’ll also assume that a couple is living together, for a total of $36,000 annually.
A single person could still retire on $300,000 in savings, but they would likely need to be stricter in their budgeting and expenses.
If you receive a pension from your job, those payments would ideally supplement your Social Security income, although they may replace it altogether if you worked for government organizations. In some cases, pensions can reduce or eliminate Social Security benefits. But when that happens, we might assume that you’ll get a similar—or higher—amount from your pension.
Additional Income Sources
If you have additional sources of “guaranteed” income, such as annuity payments or royalties, add that to your base amount, assuming that you expect it to last for the rest of your life.
For the purposes of this example, let’s say the couple receives no pension or additional sources of income. So far, we have a base of $36,000 ($18,000 per person) in Social Security income. If that’s not enough to support your needs, your savings can supplement that income.
If you rely on a spouse’s pension, ask the pension administrator what happens if your spouse or partner dies. That income might go away, leaving you with a shortfall. However, you could potentially receive survivor benefits, such as 50% or 100% of the monthly amount. You might also qualify for survivor benefits under Social Security.
Spending From Retirement Savings
How much income can you expect your savings to produce? One rule of thumb is to assume that your savings will last 30 years if you withdraw at a rate of 4% annually and adjust for inflation. In our example, this might look like the following:
- 4% of $300,000 is $12,000.
- The couple withdraws $12,000 from savings in the first year.
- Inflation during the year is 1.5%.
- 1.5% of $12,000 is $180, so they increase the following year’s income by that amount.
- In the second year of retirement, they withdraw $12,180 to account for higher prices.
Assuming flat returns and a beginning-of-year payout, the couple’s retirement account would need to outpace inflation by at least 1.5% per year to support at least 30 years of withdrawals.
In other words, your money needs to grow for this plan to work. Risk-free investments such as bank accounts might not provide the returns you need, while high-risk investments such as individual stocks could deplete your savings too early. The 4% rule was originally designed for a portfolio that invested half in stocks and half in bonds, but that allocation might not be right for you. Ask a financial advisor for help designing and implementing an investment mix that’s tailored to your needs.
The 4% rule is great for getting a ballpark idea of your retirement readiness, but it’s not perfect. It’s best to complete a thorough analysis of your spending needs and estimate your annual cash flows in retirement. Still, this rule of thumb is helpful. If you have $300,000, and $12,000 per year is nowhere near what you need to retire comfortably, you know that some things will need to change.
At this point, our couple has $36,000 of base income and $12,000 of withdrawals per year. The total annual income is $48,000 in the first year.
Although the 4% rule aims to find a “safe” withdrawal rate, there is no guarantee that your money will last 30 years. Bad timing, uncooperative markets, and other factors can potentially derail your plan.
Can I Just Live off the Interest?
One romanticized version of retirement is to build up a nest egg and live off the interest. Your principal remains untouched, you can dip into those funds as needed, and you pass assets on to your heirs.
But living off the interest requires a substantial amount of money. Even if banks paid a 1.5% annual percentage yield (APY) on your savings, you’d receive $4,500 per year on $300,000. To generate $12,000 in interest at that rate, you’d need $800,000 saved in that account for retirement.
A more realistic expectation is to spend down your assets over time—and it’s critical for that money to last for the rest of your life. The 4% rule, and other strategies, attempt to make that a reality.
Prepare for Health Care Costs
Once you retire, you’re typically responsible for 100% of your health insurance premiums. If your employer has been paying some or all of this amount, the added expense can come as a shock. According to Fidelity Investments, a 65-year-old couple should expect to spend $295,000 out-of-pocket in retirement, and that number ignores potential long-term care expenses.
While $295,000 is enough to nearly wipe out the $300,000 we’re working with, you won’t necessarily spend all that money up front. Fidelity estimates that a 65-year-old couple might spend around $11,400 in the first year of retirement. Social Security or other income sources can help cover that, but it’s almost a quarter of the $48,000 our couple has to spend annually. After those health costs, they’d have just $36,600 left.
A nest egg of $300,000 does not leave much of a buffer if you face high medical expenses.
Most people enroll in Medicare at age 65, but if you retire early, you will need to arrange health care on your own until you’re eligible for Medicare. An individual policy through a state exchange, coverage through COBRA, or a spouse’s plan are other options to consider.
What About Income Taxes During Retirement?
It’s crucial to estimate taxes for a detailed retirement plan. If your money is in a pre-tax retirement account such as an IRA, 401(k), 403(b), or 457, expect to pay income tax when you withdraw those funds. If you’re younger than 59 1/2, additional tax penalties may apply, although there are exceptions.
Fortunately, if you’re planning to retire with $300,000, taxes might not be a substantial burden.
Is Social Security Taxable?
Most of the income in our example comes from Social Security benefits, which are not taxable if your annual “combined income” is less than $32,000 for a married couple filing jointly (or $25,000 for individuals). Your combined income is:
- Your adjusted gross income
- Nontaxable income
- Half of your total combined Social Security income
Our example couple's taxable income includes $12,000 per year from retirement savings plus the $18,000 of annual Social Security benefits (half of their total combined Social Security income, or half of $36,000). That total, $30,000, is below the threshold for a couple filing jointly, so Social Security benefits would not be taxable.
Federal Income Taxes
Federal income tax liability might be quite low as well. A married couple filing jointly has a standard deduction of $24,800 for tax year 2020, and $25,100 for tax year 2021. That easily wipes out the $12,000 of taxable income our couple has. In this example, you could plan to spend all of the money you receive without needing to budget for federal income taxes.
Taxes can be complicated, and the rules change periodically. Review your numbers with a CPA before you make any big decisions.
You now know how your finances might look if you retire with $300,000 and follow the 4% rule. To improve your chances of success, get familiar with some of the challenges you may face.
The amount you spend is one of the most important pieces of your retirement plan, as it determines how much you need. To get familiar with your spending, track it for several months, or review transactions in your bank and credit card accounts going back several months. Remember that you might eliminate some expenses, such as mortgage payments or costs related to your commute, during retirement. However, you might also accumulate more, such as increased premiums for healthcare coverage.
Investments can help grow your money and keep up with inflation, but it’s always possible to lose money in the markets. The first few years of your retirement are especially critical.
If you take withdrawals when the market is down (particularly at the beginning of your retirement), you could run out of money sooner than expected. Because of that, it’s smart to assess your risk as you approach retirement, and review your investments regularly—especially in the early years.
If you suffer from bad timing (retiring at the beginning of a market crash), you might be able to adjust your withdrawal strategy and reduce the damage. Consult with a financial professional before losses get out of hand.
Is Retiring on $300,000 Realistic?
In our example, having $300,000 at retirement might allow a couple to spend $48,000 per year (or about $37,000 after healthcare expenses), but that might not be enough for you. For some, it’s plenty, but it depends on where you live, health care expenses (which involve several unknowns), and other factors.
Moving to a less-expensive area—even a less-expensive country—is one strategy to make your income go further. For example, rural areas in the U.S. tend to have lower costs of living than large metropolitan cities and the suburbs surrounding them.
What to Do if Your Retirement Savings Is Not Enough
What if you run the numbers using your own Social Security and pension income, but it’s not enough for you to retire comfortably? There are several ways to address this shortfall, but the options might not appeal to you, or they might not even be feasible.
Working longer gives you more time to save, which increases the amount you can withdraw later. If you’re in your highest earning years, you can add big value to your Social Security calculation. That, along with claiming Social Security and pension benefits at an older age, may result in a higher monthly income. You’ll have fewer living years left to fund, which may make it easier for the money to last.
Reduce Spending Goals
If you can live on less, retiring becomes easier. But at some point, this becomes risky. With unknown health care expenses and potential difficulty re-entering the workforce, it’s dangerous to cut things too close.
Evaluate Home Equity Options
Home equity can be used as a resource to supplement retirement savings, but it needs to be accessed. Consider downsizing. If your children are out of the home, or you want a place with no stairs (to reduce the risk of falls as you age), it makes sense anyway. Alternatively, you might be able to borrow against your home with a reverse mortgage. It can be risky to put your home on the line, and you might want to preserve that resource for medical expenses. But when faced with several tough choices, this could be the least-bad solution for your income needs.
Almost anybody can handle the tasks required to prepare for retirement, but making projections and managing investments can take time and energy. If you’d rather not do it alone, enlist help from a financial planner. A fee-only advisor may also help you get the answers you need without charging commissions.